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Lecture #2 - Growing Population and Economic Growth


The Economic System

Starting with Physics

  • First Law of Thermodynamics - "The change in the internal energy of a closed thermodynamic system is equal to the sum of the amount of heat energy supplied to or removed from the system and the work done on or by the system."
    • Energy is neither created or destroyed
  • Second Law of Thermodynamics - "The total entropy of any isolated thermodynamic system always increases over time, approaching a maximum value."
    • To do work, there has to be an energy difference. 
    • Entropy means energy differences equalize over time.
    • Example - you place a hot cup of coffee on your desk.  The room's temperature and coffee's temperature equalizes.  The room is slightly, slightly warmer while the coffee is colder
      • The energy is still there from the first law
  • Economic activity like production, consumption, transportation, etc. all use energy and resources from the environment. 
    • Everything comes from the environment
    • Examine the graph:

Diagram of Resource and Energy Flows

  • Humans extract resources and energy from the environment
    • Humans use resources and energy to produce goods and services
    • Then humans consume these products
    • Each human activity generates wastes and energy that is returned to the environment
  • Human activities could do the following:
  • Resource depletion - humans extract more resources than can be replenished
    • Example
      • Humans extract water and supply it to cities
      • Many cities are extracting more water than the amount being replenished by rainfall
  • Pollution - human activities that degrade the environment or resource base
    • Example
      • Humans emit sulfur dioxide from burning of coal.
      • The Sulfur dioxide turns into acid rain, which damages forests and lakes.
        • Acid rain depletes minerals from the soil and raises the ph of water, killing the fish
  • Environment does have a sink capacity
    • Sink capacity - the environment can handle a level of pollution or waste with minimal impact.
      • Once the pollution or waste exceeds the sink capacity, then it damages the environment.


  • What factors drives this model?
    1. Population growth - more people consume goods and services
      • Demands for resources and energy increases
      • More wastes and waste energy is produced
    2. Economic growth - society produces more goods and services
      • Each person consumes more goods and services
      • More wastes and waste energy is produced
  • Be careful
    • Technology and institutional arrangement impact the amount of resources, energy, and waste that humans produce
    • Last 10 years, people in the United States recycle more
      • Glass bottles, aluminum, paper, plastics, etc are recycled
    • New institutions and arrangements had to be developed
      • Bins and collection centers where people can dispose of their wastes
      • Recycling centers that separates the types of waste
      • Industries adjusting their production processes to include recycled materials
      • New transportation vehicles for recycled wastes
    • Traditionally, metals have always been recycled like copper
      • Nobody throws away silver and gold
    • Market prices exist for recycled materials
    • Be careful!
      • Recycled materials do not mean it is cheaper
      • Costs money for recycling centers, sorting, machines, equipment, and transportation
        • Some claim recycling makes products and services more expensive
        • You have to compare the cost of recycling the material to extracting the material from the environment.
      • High-income countries like United States and Europe are big recyclers
        • More is said later in the Environmental Kuznet's Curve

Population Growth

  • More people put more pressure on the environment
    • Primary energy consumption increased globally by 4.3% in 2004
    • As much as 60% of the global population depends on the waters of international fresh water systems
      • Rivers and lakes of which basins are shared by more than two countries
      • Predicting fresh water shortages
      • Could have more wars and conflicts over fresh water

Graph below shows how fast the world's population is growing

Total Population since 1950

  • The developed world is 75% urban
    • The rate is accelerating in the developing world
    • By 2030 urban population is expected to rise to five billion or 60% of the world’s population
  • Sources - U.N. Population Division report World Urbanization Prospects: 2003 Revision; BP Statistical Review of World Energy June • 2005; GEO Year Book 2006; WRI 2005
  • The prediction has a problem
  • Population growth rate has been slowing and is shown below

Population Growth Rate since 1950

  • Why is population slowing?
    • Children are expensive in both money and time
      • Developed countries have close to a zero population growth rate
        • People delay having children
        • Complete an education
        • Accumulate assets like a house, car, etc.
      • Much of the population growth is in developing countries
        • HIV is impacting population growth rates in some African countries

Population Growth Rate by Country

  • Now we see why Mathusian ideas keep coming back
    • Population growth is taken as, Pt = Poert
      • P is population, r is growth rate, and t is time
        • Net growth is birth rate – death rate
    • Paul R. Ehrlich wrote The Population Bomb in 1968
      • A best seller
    • Disastrous predictions for resources and environmental degradation
      • Running out of petroleum
      • Killing off all the fish (over harvesting)
      • Many species are going extinct
    • Biologist use a logistic growth function for species
      • It is an upside down "U-Shape"
      • Example - yeasts
        • Add yeasts to a juice, wort (i.e. before beer is beer), or sugar solution
        • The yeasts rapidly multiply, consuming the sugar
          • Ethanol and carbon dioxide are waste products
        • Eventually the yeast population reaches a peak and then population declines
          • As ethanol reaches about 12%, the yeast dies in their wastes
      • Many examples of this in biology 
    • Environment has a carrying capacity
      • The level of population a natural resource base can sustain without depletion, whether is be humans or animals
      • Once the population passes the threshold of the carrying capacity, then population declines.
      • Population is depleting the resources
  • More people consume more goods and services
  • Economics
    • Demand function - relationship between a market price and quantity demanded by the consumers
      • Law of Demand - a higher market price means consumers reduce their quantity demanded
    • Supply function - relationship between a market price and quantity supplied by the producers
      • Law of Supply - a higher market price means producers want to increase their quantity supplied
    • A market brings these two behaviors together
      • Market price and quantity are shown below:

Market showing supply and demand functions

  • Market is stable
    • If price is higher than market price of $2
      • Market has a surplus
      • Producers are supplying more than what consumers want
      • Producers lower the price until the price is $2 again
    • If price is lower than market price of $2,
      • Market has a shortage
      • Consumers want more than what producers are supplying
      • Producers raise the price until it is $2
  • Market has many assumptions
    • Lectures 3 and 4 we will discuss market failures
  • Why do some markets have a perpetually shortage or surplus?
    • Government is intervening with the market price
  • Why is demand and supply important?
    • Higher population means more people, and thus, more consumers
    • Demand shifts to the right
    • Market price and quantity both increase
    • Producers increase their quantity supplied

Market showing a demand increase

  • Humans have market prices for their goods and services
  • High market prices cause
    1. Industries expand to the higher demand and price
      • More suppliers enter the market
      • Supply shifts right
      • Market price falls
      • The price drop depends on industry and its long-run cost
    2. More products are supplied to market
      • More resources are located and extracted
      • More waste are generated
    3. Spurs technological progress
  • If many industries are expanding within a country, then we have economic growth

Economic Growth

  • Macroeconomics
    • Gross Domestic Product (GDP) - the traditional measure of macroeconomic performance
      • GDP is the sum of the money values of all final goods and services produced in a country during a year.
        • Does not include sales of intermediate goods and services
        • Only includes products and services produced within a country
        • Does not include voluntary work
        • Does not include degradation to the environment
        • Does not include depletion of resources
          • Depleting a stock of natural resources (e.g. oil, minerals, forests) increases GDP
          • Used in production of goods and services
          • Future generations could be hurt
            • Less petroleum or no forests if they are cut down
  • Economic growth -increases in GDP
    • Usually GDP per-capita output
      • Per capita is per person
      • A higher GDP per capita means each citizen has more goods and services
      • Thus, population is important.
    • Picture below shows GDP percent-growth rate in 2007
      • Before the 2008 Financial Crisis

Real GDP growth rate for the world-CIA Factbook 2007

  • Derivation of a Growth Model
    • Total production of goods and services in a country are treated as one large production function for whole economy
    • Common in growth theory

GDPt = f(A, Kt , Lt , Rt , Et

  • Variables are
    • GDP at time t
    • A is autonomous growth
      • Reflects technology, usually the intercept in a regression equation
    • K is capital
    • L is labor
    • E is for energy
    • R is for natural resources
    • Usually equation has E or R, but not both
      • Petroleum or coal are resources that society derives energy from
  • Is economic growth good or bad for the environment?
    • More growth means GDP is increasing
    • Requires more resources and energy
    • Technology can change A too, creating an offset!
  • If government imposes restrictions on natural resources or energy use, then regulations put restrictions on natural resources, R, or energy, E.
    • Companies could adjust capital, K, or labor, L, but restrictions would most likely lower GDP growth
    • Technological progress could increase A also
  • It is difficult to measure impacts of regulations on resources, environment, and GDP
    • Example
    • Government imposes a regulations to reduce air pollution in a city
      • Causes higher costs
      • People may be healthier
        • Live longer, work harder, pay less money for medical problems, etc
    • Thus, regulations slow GDP down initially, but healthier people make GDP grow faster.

The Environmental Kuznet's Curve

  • Kuznet's curve is a hypothesized relationship between environmental degradation and income per capita.
    • The shape of the relationship is an upside down U-shape.
      • The shape is estimated as a quadratic, Et=f(GDP, GDP2), where E is pollution emissions at time t per capita and GDP per capita.
      • When income per capita is low, a country does not invest in pollution abatement.
      • As income per capita increases, a country invests in more pollution abatement.

Example of an Kuznet's Curve

  • Examples:
    • Society goes through transitions from agricultural to heavy industrial, which increase pollution.
    • Over time, heavy industrial is replaced with services and light industrial, which generates less pollution.
    • Environmental regulations can strengthen over time as country develops.
    • Higher income allows more investment in pollution equipment.
    • Country goes through deforestation and then afforestation.
  • Criticism
    • Some pollution levels increase at a decreasing rate.
      • Carbon dioxide emissions
        • Technology reduces a car engine's CO2 emissions
        • Higher incomes means more people buy cars
    • One possible reason for the problems of finding the Kuznet curve is the process of learning.
      • As developed countries develop pollution abatement technologies, developing countries can implement these technologies at a faster rate, which give different estimates of the Kuznet curve.
      • Latecomers had the advantage of learning from other nations' environmental policies.
        • They learn what works and does not work
      • This is a technological leader-follower model.

Japan's History of Environmental Policy

  • Early concerns about damage from copper mining arose in 1868
  • Government did not pay serious attention to the environment until after World War II.
    • United States helped re-develop their country
  • National economic development was the central government’s top priority.
    • Pollution was viewed as a local government problem.
  • Rapid growth in the 1950s led to increases in pollution.
  • 1958
    • Japan had disease outbreaks from water pollution
    • The National Diet passed two water quality laws in 1958
      • The first laws at the national level.
  • Before hosting the Tokyo Olympics in 1964
    • International pressure to improve water quality in the Sumida River in Tokyo.
    • Japanese government created the Pollution Control Division of the Ministry of Health and Welfare (1964) and the Basic Law for Environmental Pollution Control (1967).
  • Recently, Japan has focus policy focus shifted to global issues.
    • Kyoto Protocol - reduce greenhouse gas emission to slow down global warming
    • Japan is now focusing on “quality of life” issues.
  • Not mentioned
    • Since the early 1990s, the Japanese economy entered into two decades of sluggish growth
      • Real estate prices are still dropping and economy has weak growth

China's History of Environmental Policy

  • Mao Zedong declared in 1949 that pollution was a capitalist problem that did not exist in socialist countries.
  • In 1972, water pollution began to attract the government’s attention
  • Environmental Protection Law passed in 1979.
    • The Constitution stated that protecting the environment was the responsibility of the state.
    • Polluters should be held responsible for pollution treatment, including a polluter pays fee system.
      • Government has lack of resources
      • Local governments focus on growth
        • More factories, more jobs, more income, and more taxes
        • Local governments opened illegal coal mines and built electric power plants without the national government's approval
  • The Olympics were held in China in 2008
    • China was embarrassed about the green water off of Shanghai
    • Some Olympiads wore gas mask in Beijing because of the high air pollution levels
    • Maybe the Chinese government will add more environmental laws

The Developing World

  • The developing world
    • Have higher population growth rates
    • Moving from agrarian societies to industrialized societies, which results in more pollution.
    • Increasing urbanization
      • People are moving to the cites, because that is where the jobs are
        • Same thing in the United States and Kazakhstan
  • Potential Problems
    1. Urbanization - environmental problems become problems when people are close together, so that their actions affect others nearby.
      • The infrastructure to support increased populations is lacking in many cities.
        • Fresh water, collecting and treating waste water, solid waste disposal, etc.
    2. Weak governance
      • Not only are regulations often weaker, but the government may not enforcement compliance.
    3. Corruption and lack of democracy are also problems.
    4. Lack of information/education
      • Educated people (in the United States) are pro-environment
        • Encourage environmental regulations
    5. Developing countries have wide spread poverty
      • Leaders emphasize economic growth
        • Place less weight on future considerations like environmental damage or resource depletion
      • Developing countries may use less efficient technologies
        • They could buy the old equipment and machines used in developed countries
        • Less efficient machines use more energy and resources
  • Benefits
    • If they become high-income societies, then they may invest in green technologies or replenish renewable resources
    • Population growth rate slows down
    • However, high-income societies use more resources and produce more pollution such as carbon dioxide.
  • Leakages - not in many introductory courses
    • United States - environmental laws became too harsh
      • Compliance costs were too high
      • Some industries relocated to countries like Mexico and China
        • Weak environmental laws
        • Cheaper labor
      • These industries pollute even more shipping their products to the United States
      • High U.S. incomes are indirectly creating large amounts of pollution
    • I think this happened to Japan too
      • Japan started to outsource the production of goods and services to other Asian countries.
      • Japan was big investors in other countries like China, South Korea, etc.
    • Some countries activity seek out companies, trying to get them to invest in their economies
      • Creates jobs, incomes, economic growth, and more tax revenue

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